Bitcoins: when will they crash and what is coming next?

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Bitcoin is the first implementation of decentralised money controlled by cryptography rather than any central authority…

What this really means is it is a currency independent of any one government’s control and the supply is limited (by a set of algorithms) which govern the speed new coins can be generated. Transactions are verified by a third party (known as ‘miners’) to eliminate fraud and there is an upper limit  (around 21 million Bitcoins) to control the supply of the currency. Bitcoin transactions are like cash in the sense that they can be anonymous with the seller having no knowledge of the buyer’s identify & visa versa. Bitcoins are also a payment system like Visa or Paypal (via the miners) as well as a currency.

The origins of Bitcoins are slightly murky (the architect’a name ‘Satoshi Nakamoto’ is a pseudonym) and emerged from a convergence of cryptology and the open source movements in 2008. As with most new technology, early adopters of Bitcoins used the currency for illegal activities on the ‘Dark Web’ such as Silk Road, laundering and as payments for electronic blackmail. Now the currency is gaining more acceptance with a wide range of on-line and other businesses accepting it as a valid alternative payment method.

Governments, central banks & law enforcers are concerned about the emergence of Bitcoins for two main reasons;

  • Loss of control – controlling the value of a currency (through supply, interest rates etc.) is a mechanism to control demand and so impacts inflation, balance of payments and so on. If a new payment mechanism outside of this starts to gain popularity then these levers become less effective;
  • Criminal opportunities  – anonymous transactions allow opportunities for criminals to safely transaction between themselves, and to provide a secure mechanism to extract money from legitimate businesses and individuals through blackmail, extortion in addition to the potential for exploiting the public’s lack of knowledge of Bitcoins. It is starting to make inroads into the criminal’s oldest friend – high value currency notes.

After a relatively quiet introduction in 2009 the value of Bitcoins rose relatively steadily until 2013 when the first boom and crash was experienced in April with the value doubling and then halving in a month. At the present time a Bitcoin is worth $1,100+ dollars which is over 10 times the value it was in January and more significantly 5 times what it was worth in October…

 

 

 

 

Even criminals are affected by this currency inflation. Cryptlocker – a popular piece of ‘ransom-ware’ (which infects and encrypts a person’s files and only then provides the password for a fee) used to charge 2 Bitcoins for the release of the key and now has a 1 and also a 1/2  Bitcoin version to cope with the rising value and to make it viable for people and business to pay.

Looking at the graph it seems likely that a correction in value for Bitcoins is overdue but, assuming acceptance of them continues to grow then the upward rise of the value may well continue upwards at a fast pace before slowing. The Bitcoin community recognise this as likely with the limited supply and increasing demand. They are fully expecting to break each Bitcoin into  millibitcoins (0.001 of a Bitcoin). We think there will be a major correction soon but, as long as confidence in the currency is not knocked too significantly, then the upward valuation of Bitcoins will continue to gather pace.

So what can stop the onwards march of the Bitcoin? We see a number of risks before Bitcoin becomes mainstream;

  • Distrust – The concepts of  cash, currencies and banks have existed for hundreds of years. A new model built on obscure algorithms and codes without any obvious ‘owner’ may take some time to resonate with the public
  • Reputation and moral obstacles – Bitcoins have been tainted with the utilisation by criminals and this may reduce or slow down take up of the currency. This has been highlighted by press and law enforcement agencies and could limit it’s acceptance
  • Governments, central banks and police forces are generally against Bitcoins. Some are trying to limit it’s growth and others are trying to ban the currency. It will be an interesting battle to watch
  • Competition from other new forms of currency. Bitcoins are the dominant cryptology currency but there are many other electronic ‘Coins’ out there. There is no reason why one or some of the others will not increase in popularity
  • Other payment mechanisms have very deep pockets and will not give up without a fight. Paypal & Visa will embrace the concept but will want to take advantage and build their own currency businesses out. How they do that is a work in progress but they have the transaction value and trust of consumers and businesses.
  • Technology – there must be the ‘next big thing’ waiting in the wings to supersede Bitcoins – Quantum computing is the obvious direction for this as the levels of complexity and so encryption & security would go up immensely. Also emerging technology may be able to break the encryption so destroying trust and so value in the Bitcoin.
  • Volatility – this is probably the oldest but most likely impact to acceptance of Bitcoins. We are currently in a phase of Bitcoin ‘hyper-deflation’ where 1 bitcoin in October would buy $200 and  now it would buy $1,100. This is a major positive if you are a holder of Bitcoins but the cost of purchasing Bitcoins has risen 5 fold. If this continues or stabilises as the Bitcoin community expects then all will be fine. But if there was a decline in value it would likely be accelerated given the volatile nature of the currency which may trigger ‘hyperinflation’ and a crisis of confidence….

Whatever the future of Bitcoin itself it looks like there will be significant growth in alternative currencies and payment mechanisms. In time this will have major impacts on how nation’s economies are run and controlled. There will be opportunities for many new forms of businesses to take advantage of these electronic currencies; new forms of gaming, selling and treasure hunting for lost Bitcoins.

Exciting times! – and unlike cash you are less likely to lose a Bitcoin down the back of the sofa but don’t forget to  backup your Bitcoin wallet!

 

 

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Posted on : 29-11-2013 | By : richard.gale | In : Innovation

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Comments (3)

[…] article last year on the future of virtual currencies provoked a great deal of interest (“Bitcoins: when will they crash and what is coming next?“). One area we didn’t touch on was the threat to banks and other payment systems. […]

[…] discussed the rise and fall and rise of virtual currencies in a couple of previous articles (When are Bitcoins going to crash and what’s next?,  The hidden costs of transacting with virtual […]

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